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Home Purchase

• Why Should I purchase a Home?

Purchasing a home can be one of the most rewarding decisions you can make. Though purchasing a home involves many factors, it has several key advantages over renting. For one, homeownership can be a strong investment where, historically, real estate appreciates in value over time. Each monthly mortgage payment you make earns you a greater percentage of, or equity in, your home. You also benefit from federal income tax laws which allow you to deduct mortgage interest paid (a hug chunk of the actual loan), property taxes, origination points, and home buying expenses such as legal fees and administration costs.

• How expensive is purchasing a home?

For most people, buying is more expensive than renting, but the tax deductibility of your mortgage expense makes the prospect of owning a bit more practical. Once you have made the leap and decided that you are going to buy a home, you have to find out what you can afford. That is where we come in.

• Is there a right way to find the right house for me?

First, figure out how much you can afford to spend on both a down payment and monthly mortgage payments. Decide where you want to live and how. How much room do you need? Do you want to buy a condo, co-op, or single-family home? Do you want to have a renter? What amenities (fireplace, deck, backyard) are non-negotiable? Once you've figured out what you want, you'll likely find it by searching for homes through real-estate brokers and the Internet.

• How much home can I afford?

How much home you can afford depends on the area you want to live, your income, your debt, your credit rating, and other financial factors that determine the size and type of mortgage you are applying for.

• What is the information I need prior to looking to purchase home?

Before you start shopping for a home, you need to itemize your debt, list your assets, and get your credit report to see if you can afford a mortgage.

• How important is it to improve my credit score?

A good credit score is an important element in getting a good mortgage. Pay down as much debt as you can before you get started in your search, particularly credit card balances.

• What's a down payment?

A down payment is the part of the purchase price that comes from your personal money supply, not out of your loan. As prices rise, coming up with a down payment is one of the biggest hurdles for first-time buyers. The larger a down payment, the more likely you’ll get a better interest rate.

• How much should I put down?

House sellers like big down payments, so that may be a factor for you in your home search, but the down payment should be directly related to what you can afford. The rule of thumb is to put down 5%, 10%, or 20% of the sale price. The more money you put down, the lower your mortgage payments will be. Be sure to have enough money left in the bank after you close to deal with the closing costs.

• What's the difference between lenders, brokers, and banks?

A broker typically acts as a "middleman" between a customer and lender and may or may not actually provide financing. A lender typically provides financing but often does not offer depository services. A bank provides financing and depository services. Credibility, dependability, and longevity in the marketplace are the three most important factors to look at when considering a lender, broker, or bank to work with.

• What's a sub-prime lender?

So-called sub-prime lenders are lenders that specialize in making loans to borrowers with fair to poor credit histories or high loan-to-value ratios.

• How do I shop settlement costs?

Settlement costs can include everything from broker commissions and loan-origination fees, which cover the lender's costs in processing the loan, to appraisal and credit-report fees. Many of these fees are fixed, but some can be negotiated.

• What is an APR?

The Annual Percentage Rate or APR is a tool intended to make comparison between mortgages simpler for the average consumer by disclosing the "total cost of credit", including fees, expressed as an annual rate. The APR is part of the Truth in Lending disclosure statement that is required for all residential mortgage loans.

• Which is better - a fixed or adjustable rate mortgage?

It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:

• the interest rates and mortgage options available when you're buying a house
• your view of the future (generally, high inflation will mean ARM rates will go up and lower inflation means that they will fall)
• your personal financial and investment goals, and
• how willing you are to take a risk.

When mortgage rates are low, a fixed rate mortgage is the best bet for many buyers. Over the next five, ten, or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARMs teaser rate will adjust up soon and you won't gain much if you plan to stay in the house more than a few years (the broker can tell you your break-even point). In the long run, ARMs are likely to go up, meaning many buyers will be best off locking in a favorable fixed rate now and not taking the risk of much higher rates later.

• What does my mortgage payment include?

For most homeowners, the monthly mortgage payments include three separate parts: Principal: Repayment on the amount borrowed Interest: Payment to the lender for the amount borrowed Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.

• How do I find the right product for me?

If two mortgages were exactly identical in terms of length and fees, but one charged a lower interest rate than the other, you'd pick the cheaper one. Unfortunately, it's hard to get an apples-to-apples comparison, so the starting point for comparing mortgages is the length of the mortgage and its interest rate. Then look at terms (such as prepayment penalties), fees, and options (such as paying points) before making your decision.

• What goes into an interest rate?

An interest rate is the cost you pay to borrow money. An interest rate is determined by several factors including the market cost of funds to the lender, plus the cost associated with the risk of lending that money. As a result, the cost of money is always changing.

• What's the difference between a 30-, 20-, and 15-year loan?

Mortgages come in different terms. Shorter loan terms often come with lower interest rates although the monthly payments are higher because the time to payback the amount borrowed is shortened.

• What's a 'point'?

Paying a point, also known as a discount point, buys the interest rate down on your loan. You give the mortgage lender or bank more money up front, to lower your interest rate. Note that it's not a "down payment"; a point is part of your loan. One point is one percent of your loan amount, not of your house price. For a $400,000 house with a $300,000 mortgage, one point is $3,000.

• Should I pay points?

It depends on how long you're planning to stay in your home. Generally, if you're going to stay less than five years, paying for points isn't worth it; if you're going to stay for more than 10 years, it may make a lot of financial sense.

• What mistakes do mortgage shoppers make?

The most obvious mistake is that they don't realize that prices change from day to day. You can't compare a quote from one bank last Wednesday with a quote from another bank today. Each mortgage is unique to the borrower’s circumstances.

• When is the right time to lock?

For some, locking a great rate right away feels safer than riding out market fluctuations. Others argue that floating an interest rate is the only way to take advantage of potential price decreases. The real trick is selecting a lock-in period long enough for your loan to be processed.

• What if my lock-in period expires?

Whether it's the result of a misplaced document or a delay stemming from construction issues, lock-in periods can and do expire. It's not the end of the world. Lenders will often let you extend your lock period -- although you may lose the favorable interest rate and the number of points you had locked.

• Why should I get my lock-in in writing?

When it comes to establishing a lock-in agreement, the written word is the only way to go. Most lenders have pre-printed forms that outline the exact terms of the agreement. If you don’t understand the agreement, ask your lender or broker to explain it to you or show it to a lawyer or real estate professional for clarification.

• What is the difference between loan pre-qualification and loan pre-approval?

Pre-qualifying is the process to determine whether you are likely to qualify for a loan with a lender, and for what amount you would likely qualify for. Pre-approval comes when the loan officer performs a comprehensive review of your creditworthiness with independent verification including W9s and W2s, credit reports, etc. and approves you for a specific loan amount. Once the loan has been approved, the lender issues a commitment fund the loan, pending at least an appraisal of the property, title report, and purchase contract.

• Are income and debt both important?

Absolutely. The two go hand-in-hand. You may be pulling in the big bucks, but if you have a history of spending beyond your means and racking up enormous debt, a lender may not see you as someone capable of meeting monthly mortgage payments.

• What's 100% financing?

One hundred percent financing means that there’s no down payment. Zero down is typically used by first-time buyers with limited incomes or college graduates in their first year of employment. But buyers beware: These loans have higher risk to creditors d so lenders protect themselves by charging higher interest rates and requiring mortgage insurance.

• Is a Closed-End Second Mortgage for me?

In a closed-end second mortgage the interest rate is usually higher than a first mortgage interest rate. Borrowers typically use second mortgages to make improvements to their home like adding a swimming pool, or to pay off debts. A second mortgage can assist with debt consolidation by combining all high-interest debts into one low monthly payment, but remember the repayment term on a second mortgage may be longer.

• What's a Reverse Mortgage?

A reverse mortgage is exactly what it sounds like: a home mortgage where the lender pays you. It allows people age 62 and older to stay in their home while taking out some accumulated equity without selling. You can choose to get the payout monthly, in a lump sum, or as a line of credit to tap into when needed (the latter being the favored choice among retirees using this vehicle).

• What's the difference between a temporary buydown and a permanent buydown?

A temporary buydown reduces your interest rate in the early years of a mortgage loan. in exchange for an up-front cash payment to the lender provided by the home buyer, the seller, or both. A permanent buydown is the payment of points in exchange for a lower interest rate for the life of the loan.

• Does the government sell FHA mortgages?

No. The Federal Housing Administration was founded in 1934 to provide families with access to homeownership through reasonably priced, low down payment, government-insured mortgages. FHA loans require a down payment of at least three percent, but the maximum loan amount is relatively low and varies from county to county.

• How do I make Interest Only work for me?

In an Interest Only "I/O" loan, the borrower pays no principal until a reset point, which can be anywhere from 5 to 20 years in the future. I/Os are great if you want a larger loan amount or a bigger, better house because they lower the required initial payment.

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